E. Asia asked to talk about exchange rate

The Asian Development Bank (ADB) has called on governments and monetary authorities in emerging East Asia to cooperate more on exchange rates and other policies to turn the swift post-crisis recovery into more balanced, long-term growth.

“Regional exchange rate cooperation — if handled wisely — can ensure intra-regional exchange rate stability while allowing inter-regional flexibility; thus helping promote intra-regional trade and investment, and rebalance the region’s sources of growth,” ADB said in the special section of the latest edition of the bank’s Asia Economic Monitor released Tuesday.

Emerging East Asia’s large, long-standing trade surpluses against developed economies’ increasing debt have raised tensions culminating in calls for emerging East Asia to allow its currencies to appreciate to match its growing economic strength, it said.

Asia’s swift recovery from the recent global crisis is also drawing foreign investment to the region. Managing capital inflows to prevent asset price bubbles has also become a concern, it added.

“Rapidly growing interdependence in trade and finance and the increasing importance of spillovers and contagion effects within the region make regional exchange rate cooperation essential,” said Iwan Azis, the head of ADB’s Office of Regional Economic Integration that prepared the report.

“At the same time, regional currency flexibility against major currencies outside the region would help emerging East Asia better manage capital flows and respond to external shocks,” Iwan said.

The Asia Economic Monitor suggests the best way forward would be for East Asian economies to adopt informal monitoring zones for their exchange rates against an external reference currency or a basket of currencies. Any big shift outside those non-binding zones would prompt confidential discussions to reduce deviations. Over time these arrangements could become more formal.

The report assesses the outlook for emerging East Asia, which comprises the 10 economies of the Association of Southeast Asian Nations, plus China; Hong Kong, South Korea; and Taipei China (Taiwan).

The report notes that the weaker outlook for the global economy coupled with the phasing out of fiscal and monetary stimulus within the region means economic growth in the region should moderate next year.

Average growth in emerging East Asia is likely to be 7.3 percent in 2011 after growing 8.8 percent in 2010.

In its Asian Development Outlook 2010 Update, published in September, ADB had predicted growth of 8.4 percent for the region this year after a 5.4 percent expansion in 2009. The 2010 upgrade was in large part due to the faster-than-expected growth in China which ADB now sees at 10.1 percent this year. That is higher than its previous forecast of 9.6 percent in September. ADB still expects the Chinese economy to expand 9.1 percent in 2011.

In a separate special note reassessing the overall performance of developing Asia — that is, 45 developing economies of Central Asia, East Asia, South Asia, Southeast Asia and the Pacific — ADB upgraded its 2010 forecast to 8.6 percent from the 8.2 percent it forecast in September.